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In Congress, Role Reversal Over Federal Payroll Tax Cut

WASHINGTON — In a sharp role reversal, Democrats and Republicans have become divided over whether to extend a federal payroll tax cut enjoyed by working Americans this year, with Democrats leading the charge for the tax break and many Republicans demanding that the cut be paid for if it is extended at all.

It is a shift from the recently failed deficit talks when Republicans pushed for extending Bush-era tax cuts without paying for them and Democrats argued against added tax breaks for the most affluent Americans. Now the fight over how to handle the tax cuts as well as added unemployment benefits is set to play out in the final month of the year as the two parties prepare for a politically charged 2012.

Congressional Republicans have long insisted that tax cuts keep money in the hands of Americans who then funnel it back into the economy, negating the need to offset the revenue loss. Echoing many of his Republican colleagues, Senator Jon Kyl of Arizona, the No. 2 Senate Republican, once said that “you should never have to offset the cost” of tax cuts on Americans.

But the party appears to be making an exception for renewing and extending a cut that would reduce the Social Security payroll tax paid by employees by half, to 3.1. percent of wages from 6.2 percent. The position angers Democrats, who see it as unfair given the Republican position on the broader tax cuts that expire at the end of 2012.

“The only place in America that people don’t want a fair system are Republicans here in the Senate,” Senator Harry Reid of Nevada, the majority leader, said in a news conference on Tuesday.

Despite the fact that they have signed the now famous pledge not to raise taxes, many Republicans, particularly in the House, oppose the extension on basic principle, arguing that the reduction in the payroll tax paid by employees does not stimulate the economy. They also fear it harms the Social Security fund in the long term, though the losses would be replenished by the general fund.

“I think that it is time we stop with putting these Band-Aids over huge chest wounds,” said Representative Allen B. West, Republican of Florida. “We continue to leverage this short-term political gimmick over the long-term viability of Social Security.”

Photo

Senator Jon Kyl, Republican of Arizona, once said that “you should never have to offset the cost” of tax cuts on Americans.Credit
Philip Scott Andrews/The New York Times

The idea that a tax cut must be paid for — and the fact that Democrats are not seeking the payroll tax relief without offsetting its costs this time — reflects the politics of austerity that dominate the 112th Congress, in which deficit spending is the fiscal equivalent of the sun-dried tomato — extremely passé.

“With this $15 trillion debt we now have,” Senator Mitch McConnell of Kentucky, the Republican leader, said Tuesday, “we have to pay for a measure like this, and I think we will pay for it.”

Indeed in the Senate, where the fight over the payroll tax break began this week, Republican support for the extension is growing, as long as it is paid for in a way that passes muster with the party. Democrats introduced legislation that would pay for the extension — which would also lower the portion of the tax paid by employers, at a cost of roughly $115 billion — with a 3.25 percent surtax on income over $1 million, an idea Republicans have already rejected. Democrats openly acknowledge it is little more than a stunt to emphasize the vast policy divisions between the parties.

Mr. McConnell said Republicans would offer an alternative this week; he declined to provide details. Senator Susan Collins, Republican of Maine, said Tuesday that she had suggested a tax increase on high earners that protected employers from that burden. “I don’t think we should be imposing additional taxes on working families at a time when the economy is so fragile,” she said.

Senator Pat Roberts, Republican of Kansas, said his party’s plan could involve a small increase in taxes for some high-income people who meet certain criteria.

A similar dynamic — though with some different features — is expected to shape the debate over whether to extend unemployment benefits set to expire at the end of the year, as well as other measures.

While many economists say a payroll tax holiday is good for the economy because it allows working- and middle-class Americans to retain hundreds of extra dollars to buy things, detractors argue that most of that money is saved, not spent, and therefore does not jolt the economy.

One Republican up for re-election, Senator Scott P. Brown of Massachusetts, goes further than Democrats who are pushing for the tax cut to stay. “It wasn’t paid for before so why it is paid for now?” Mr. Brown said Tuesday. “It will pay for itself.”

Correction: December 3, 2011

An article on Wednesday about the tax debate in Congress described incorrectly the recipients of the payroll tax reduction that President Obama has proposed to extend in 2012. All working Americans who contribute to the Social Security system through payroll tax withholding receive the reduction; not all workers, as some are covered by other retirement programs. The article also misstated the year the reduction is in effect. It is this year, not last year.

Robert Pear contributed reporting.

A version of this article appears in print on November 30, 2011, on page A22 of the New York edition with the headline: In Congress, Role Reversal Over Federal Payroll Tax Cut. Order Reprints|Today's Paper|Subscribe